Public Labs Enjoy Boom Times As Revenues & Profits Climb

First quarter earnings reports demonstrate that lab industry is returning to financial health

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TAKEN COLLECTIVELY, second quarter earnings reports by public lab and pathology companies send a strong message: the lab industry is in the midst of a revenue and profit boom.

It’s been more than a decade since every public lab and pathology company reported strong growth in both revenues and operating profits. This is an important fact. These healthy increases in operating profits give commercial lab companies more financial resources to compete for additional business.

Intensified Competition

Hospital laboratory outreach programs and local pathology group practices should be ready to see intensified competition for lab testing and biopsy business. For the first time in several years, national lab companies can devote additional resources and management attention to improving the effectiveness of their sales and marketing programs. Their goal will be to increase market share at the expense of local lab testing providers.

A survey of the public lab and pathology companies demonstrates the extent to which the current healthcare marketplace is supporting growth in lab testing revenues and operating profits. Here’s a brief profile on each.

Quest Diagnostics Incorporated: First quarter revenues were $883 million, a gain of 7% over same quarter last year with adjustments for its network management business. But net income doubled, from $17.8 million in Q1-00 to $35.7 million in Q1-01.

Two statistics would indicate that Quest Diagnostics’ operational emphasis on ISO-9000 and Six Sigma is taking hold. Days sales outstanding (DSO) improved to 51 days, compared to 56 days at the end of fourth quarter. This is probably the lowest DSO in the lab industry. At the same time, bad debt expense, the measure of how successfully a lab is collecting the money owed it, dropped to 6.3% from 7.3% for same quarter last year.

Laboratory Corporation of America: Financial gains were equally strong at LabCorp. Revenues jumped 13.6%, reaching $525.4 million, compared to $462.7 million for Q1 last year. Net earnings climbed 69.3% reaching $43.5 million in Q1-01 from $25.7 million in Q1-00.

Days sales outstanding (DSO) at LabCorp is currently 67. LabCorp attributes its revenue increase of 13.6% to a 6.2% increase in volume and a 7.4% increase in price.

Dynacare, Inc.: Now the third largest public lab when measured by revenue, Dynacare’s revenue growth has been fueled primarily by lab acquisitions and hospital laboratory partnerships.

Revenues for first quarter were $95.8 million, a gain of 19.9% from the $79.9 million during the same quarter last year. Dynacare reported modest net earnings of $2.1 million for first quarter. Like the two blood brothers, days sales outstanding improved at Dynacare. It was 63 days, an improvement from a DSO of 69 days at March 31, 2000.

LabOne, Inc.: It was a similar story at LabOne. Revenues jumped 23% for the quarter, reaching $50.0 million compared to $40.5 million for same quarter last year. Net income remained unchanged at $.04 million.

Specialty Laboratories, Inc.: Because of its exclusive focus on esoteric and reference testing, Specialty Labs is quite different than the other public labs reported here. Nonetheless, Specialty Labs is also enjoying rapid growth. Revenues hit $43.8 million, a gain of 23%. Net income jumped 86%, from $1.9 million in Q1-00 to $3.4 million in Q1-01.

Bio-Reference Laboratories: For the quarter ending January 31, 2001, revenues increased 22%, to $18.4 million. Operating income jumped 139%, to $.5 million from a loss of $.1 million for same period last year.

Public Pathology Companies

Across the board, public pathology firms have posted equally strong gains in revenue and operating profits. Here’s a look at the major national pathology companies.

AmeriPath, Inc.: This is the first full quarter that AmeriPath can include the revenues from its fall 2000 acquisition of InformDX. Quarterly revenues grew to $98.7 million, a gain of 32% over first quarter 2000. Net income increased by 26.1%, from $6.1 million to $7.7 million.

DIANON SYSTEMS, Inc.: First quarter revenues were $26.8 million, a gain of 21% over same quarter last year, which totaled $22.1 million. Net income climbed 63%, from $1.3 million in Q1- 00 to $2.1 million in Q1-01. DIANON reports a DSO of 77 days.

IMPATH, Inc.: IMPATH enjoyed a 38% increase in revenues, posting $42.1 million compared to $30.5 million in same quarter 2000. Net income climbed from $2.8 million to $4.0 million, an increase of 42%.

Days sales outstanding at IMPATH have been a problem. The company currently reports a DSO of 123 days. Effectively, this means that four months of annual revenue is tied up in collections. The company did not disclose bad debt, a number which would be affected by old and uncollectable claims.

What Does This All Mean?

It is a significant fact that every public laboratory and pathology company is reporting double digit growth for first quarter 2001. It means the demand for diagnostic testing within the healthcare system is growing. This has been expected, particularly as demographics move baby-boomers into the senior citizen category and they require more health care services.

But it is also a sign that the growing number of diagnostic tests is finding useful applications. From liquid preparation Pap smears to HIV typing and viral load testing, clinicians are ordering more tests. More importantly, they are ordering these tests because it helps them improve the quality of healthcare and also reduce the overall cost per episode of care.

THE DARK REPORT continues to believe that the financial successes generated by the public lab and pathology companies will have far-reaching impact upon the clinical laboratory industry as a whole. There are at least four reasons why this should be true.

First, investors see the profits earned by commercial labs and national pathology companies. This encourages them to look for undeveloped opportunities. For example, almost every independent lab owner in the United States can tell stories about the regular calls they get from investment groups seeking to buy their labs. These investors are searching for a platform laboratory company into which they can pump capital and management savvy to make it grow.

If current rates of growth continue, within a couple of years, physicians will be referring almost $1 billion worth of specimens to just four or five anatomic pathology companies.

Second, when public lab companies have profits, they invest these profits into sales and marketing programs so they can continue to grow. This places pressure upon hospital lab outreach programs which prefer to maintain the status quo in their market. Thus, the competitive pressure increases on local lab providers.

Enhanced Lab Services

Third, the opposite is also true. Increased competition by national labs on local hospital campuses frequently raises the competitive stakes. It stimulates the hospital lab outreach program to innovate and offer an enhanced menu of lab services to maintain and expand its own competitive market share. Certainly over the last decade some of the best innovations in laboratory testing services have originated with hospital lab outreach programs.

Fourth, whether most pathologists like it or not, the stunning and sustained success of the national pathology companies is changing the basic market for anatomic pathology (AP) services.

The reason is simple. These national pathology companies are willing to invest in improved AP services. They are also willing to invest in a professional sales and marketing program which educates referring physicians about the benefits of doing business with a national pathology company.

Look at what’s happened to the anatomic pathology marketplace during the past five years. AmeriPath has grown to a $400 million per year company. DIANON Systems will do $100 million this year. IMPATH is on track to over $150 million in 2001. These numbers do not include the revenue gains posted by Quest Diagnostics and LabCorp with their brand of AP services.

Far-Reaching Impact

All of this is happening for a reason. The national pathology companies are growing only because an increasing number of physicians, once they try a national pathology company, are satisfied enough to continue referring specimens.

If current rates of growth continue, within a couple of years, physicians will be referring almost $1 billion worth of specimens to just four or five anatomic pathology companies. THE DARK REPORT believes this is triggering a fundamental shift in how physicians utilize anatomic pathology services.

In simplest terms, the expectations of the anatomic pathology physician-customer are changing. Once these expectations have changed, there is no going back to the old system of providing AP services.

Given the current evolution of the AP marketplace, local anatomic pathology practices would be well served to re-evaluate their existing business strategies and identify ways to retain and improve their existing share of their local healthcare marketplace.


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